US Pushing Back-up Plan Amidst Fear Of Default

A back-up plan hatched by the US Senate’s top leaders seems to be the prominent solution that will spare the country a pending default on August 2, Shaw Capital Management Online found out. This contingency measure by Democrat leader Harry Reid and Republican leader Mitch McConnell aims to ease the dilemma in the seemingly endless debate on increasing the country’s debt limit.

The US government hit their debt limit of $14.3 trillion in May and currently in danger of defaulting if the limit is not raised by August. This will result to higher interest rates for the public as well as on the borrowed money of the government. But for the new borrowing ceiling to last them until the end of next year, it should be raised by $2.4 trillion.

Warnings of possible downgrade have also been issued by various entities, including the Federal Reserve and JPMorgan Chase. Moody’s Investor service is also looking at a possible downgrade of the US bond rating while Standard and Poor’s stated that they will strip the US government of its AAA rating if the deal on raising the debt ceiling is not agreed on.

“Further delays in raising the debt ceiling could lead us to conclude that a default is more possible than we previously thought. If so, we could lower the long-term rating on U.S. government this month,” S&P said.

Republicans want any increase in the borrowing limit to come with an equal amount of spending reduction. On the other hand, Democrats and President Barrack Obama aims on having tax increases as part of a long-term deficit-cutting plan.

“United States is in a different position from other countries. This is not some fiscal reform programme that they have to put in place. This is just political machinations,” said Adrian Foster of Asia Pacific at Rabobank International in Hong Kong.

True enough, President Obama has been having problems with both parties; on one side are the Republicans who want to replace him and on the other are the Democrats who want to re-elect him. Bottomline: both parties seems to be using the issue to further their personal interests which ends up with the debate looking more like performances to impress the public.

Another idea that surfaced is that US might not have the problem of being under-taxed, but just spends way too much. And as SCM Online discovered, the Central Bank is not planning on any stimulus measure any time soon.

“There’s just too much at stake politically and economically for a deal not to get done,” says John Briggs, Treasury strategist at the Royal Bank of Scotland. “It seems hard to believe that any politician would want their name attached to a default of U.S. debt.”

Surprisingly, Wall Street seems to be complacent as the stocks and bonds have been showing only the slightest hint of being concerned.

“In financial markets, you’re playing with people’s confidence,” Sam Yake, a stock analyst, says. “If enough people start thinking it’s a catastrophe, it could become so.” The prospect of such terrible consequences may be exactly the reason investors aren’t all that worried.